The Detroit Riverfront Conservancy, a nonprofit organization intended to beautify the city’s once-industrial waterfront, had more than $100 million in assets, with tens of millions more pouring in each year from government and private donors .
One man had near-total control over the group’s money, according to federal charging documents released Tuesday: its chief financial officer, William A. Smith.
Mr. Smith’s grip on the nonprofit’s finances was so tight that even the organization’s accountant, responsible for tracking expenses, couldn’t log into any of the group’s bank accounts . Only Mr. Smith had the password. He gave her the bank statements on paper and met her only four times a year, in the parking lot of a Honey Baked Ham store, 40 miles from the office.
On Wednesday, federal prosecutors said Mr. Smith abused his power to carry out a stunning fraud: He stole nearly $40 million between 2012 and last March, they said, equivalent to 39% of all money the group had reported spending during that period, burning through the group’s cash reserves.
Mr. Smith, 51, was charged with bank fraud and wire fraud, two crimes that carry up to 30 years in prison.
The case highlights a persistent problem among nonprofits. A lax or informal approach to financial management can leave groups that manage millions of dollars of public and private funds vulnerable to waste, runaway costs or, in the worst cases, internal theft. When this happens, it is often difficult to detect. Although the Internal Revenue Service oversees nonprofit organizations, the agency’s average annual audit rate is less than 1 percent.
Brian Mittendorf, a professor who studies nonprofit accounting at Ohio State University, said official conservatory records show it took steps to protect its finances, including oversight of its board of directors. and annual audits.
“All of those things make it seem like this is an organization that has some pretty rigorous scrutiny.” On the other hand, only one person can access the money and provides hard copies in a Honey Baked Ham parking lot? Mr.,” Mittendorf said. “This seems like the opposite of a robust governance mechanism. »
“It’s a story we’ve seen over and over again” in the nonprofit world, he said. “We are not approaching the financial situation with enough skepticism.”
A lawyer for Mr. Smith did not respond to a request for comment.
In a written statement, the Detroit Riverfront Conservancy praised prosecutors for investigating “a nefarious scheme to subvert levels of financial controls and divert resources from one of the largest riverfront projects in the United States.”
The nonprofit’s external auditing firm, which had conducted annual financial audits, declined to comment.
The group has successfully redeveloped a long stretch of the Detroit River waterfront and, until recently, had shown no public signs of distress. Local foundations contribute to it each year and it receives, among others, grants from the Environmental Protection Agency. In 2013, Mr. Smith was named a finalist for “CFO of the Year” by a local business magazine.
But the nonprofit discovered financial problems this spring and invited Michigan State Police to investigate, according to a Detroit News article. The police then referred the case to the FBI. In May, the group fired Mr. Forgeron.
Prosecutors say Mr. Smith used one of the nonprofit’s bank accounts — the one he held the password to — to start paying his own American Express bills in November 2012. Those bills included fees from airlines, Louis Vuitton, a diamond merchant and an interior design company.
Over the next 12 years, prosecutors say, he used the nonprofit’s money to pay $14.9 million in American Express bills. They said Mr. Smith also simply transferred $24.4 million from the same account to a company he owned.
He covered up the affair by altering paper bank statements, according to charging documents.
When he gave the statements to the association’s accountant, Mr. Smith deleted the payments to himself and replaced them with false payments to other vendors, according to billing documents.
Prosecutors said that last year, Mr. Smith had a new problem: He had stolen so much money that the nonprofit organization was cash-strapped. So he falsified documents to take out a $5 million line of credit in the nonprofit’s name, then transferred that money to the account he used to pay himself.
The association’s leaders, Mr. Smith’s supervisors, did not discover this line of credit until more than a year later.